A Life in Energy and (Therefore) Politics

The CEO of America's third-largest utility on competing in an electricity market built on political fads and lobbyists.

By

Joseph Rago

October 22, 2011

New York

'Prostitution, horse racing, gambling and electricity are irresistible to politicians," says John Rowe, the CEO of the Chicago-based utility Exelon.

He'll give you an example of what he means: In 2009, Exelon began work on an urban solar-power project on a blighted field in Chicago's West Pullman neighborhood, in part at the request of then-White House Chief of Staff Rahm Emanuel. "Whatever it is, it's not a scandal," says Mr. Rowe, who explains that his company was promised (and applied for) an Energy Department loan guarantee that it ultimately did not receive.

After the Exelon Solar City station opened in 2010 and Mr. Emanuel was running for Chicago mayor, "he asked if he could have his picture taken at the solar facility and . . . I said, 'Of course,'" Mr. Rowe recalls.

In a visit to The Wall Street Journal's offices recently, Mr. Rowe was eager to strip the altar of green jobs—and the many other political pieties that distort the energy industry, even a few that he says belong to the Journal editorial page.

"The utility business is a funny business and almost no one in any political authority in either party really believes in orderly markets in electricity," Mr. Rowe says. The Emanuel appeal was merely the latest installment in the "series of political negotiations that never ends" and is the lot of any modern energy company.

Exelon is one of the three largest utilities in the U.S., serving some 13 million retail customers from northern Illinois to southeastern Pennsylvania. "We're the biggest nuclear power plant operator and we are by far the biggest company that actually sells all of its generation in competitive markets. And we are almost the last real champion of competitive markets in the utility industry," says Mr. Rowe, who has run one power company or another since 1984. "I am the old man of the industry," he says, and he plans to retire soon.

ENLARGE

Ken Fallin

"And I was the carbon bandit," Mr. Rowe continues, with his matter-of-fact, seen-it-all candor. "I was the champion of climate regulation in the utility industry, and we are the people who back EPA regulation." The reason for this seeming contradiction—between simultaneously supporting free markets and interventions like an economy-wide CO2-reduction plan—is that "we're always being asked to do things that are in our view bleeding crazy," as he'll go on to explain.

For starters, the anti-market demands made on Mr. Rowe are bipartisan. The one thing Virginia's Republican Gov. Bob McDonnell and Maryland's Democratic Gov. Martin O'Malley agree on, he says, is the need for more offshore wind. "That is one of the two most expensive ways to procure energy I can think of," Mr. Rowe says. "And unfortunately unlike solar, it tends to come in thousands of megawatts rather than tens, so you can really throw money away on it." Mr. Rowe also mentions that Chris Christie attempted to collaborate with a Democratic legislature on a plan that would have gamed New Jersey's electricity market to favor in-state companies over out-of-state exporters.

This political economy is an artifact of the historical electricity market—which, through most of the 20th century, was not really a market at all. Until recently, almost all consumers bought electricity from a monopoly supplier at rates set by the government, with a guaranteed return for utilities. That model eroded amid deregulation in the 1980s and '90s, and the rise of more efficient wholesale electricity markets and independent generators. Commercial and now even some residential consumers are no longer captive, but the political habits persist.

"There is no such thing as a sort of Garden of Eden energy market in this country—never has been, and we're not gonna live long enough to see one." So the key questions, Mr. Rowe says, boil down to how open markets are from region to region and, among utilities, "who's pro-market and who really the mercantilists are."

Perhaps one measure of Mr. Rowe's market bona fides is that despite heading a corporation whose generation portfolio is 93% nuclear, he dismisses the industry's so-called "renaissance," the new construction wave that some are rooting for. Republicans in particular like to call him up about nuclear and he says he tells them, "Don't kid yourself that it's economic" at a market price. Building out nuclear capacity would require as much as $300 billion in federal loan guarantees and other subsidies and he adds, laughing: "There just isn't that much money. The money's gone. The printing press is broken."

Mr. Rowe continues that "Somebody else wants clean coal; it's a non sequitur and it's not economic either. Somebody else wants wind or solar, and meanwhile . . . the market says the only thing that makes sense for a decade, maybe two, is for new generation to be gas-fired. Natural gas is cheaper than everything else," thanks to domestic shale finds via fracking and other factors. "It's likely to stay that way for a long time—but it isn't what politicians want."

On that note, Mr. Rowe would like to take exception to a series of Journal editorials s this year and last raking the Environmental Protection Agency's regulatory agenda, including a December 2010 number that scored Exelon and Mr. Rowe for lobbying on behalf of said agenda. The Obama EPA has or is about to issue a cascade of air-pollution regulations that will force a large portion of the country's coal-fired power fleet to retire or utilities to spend billions on upgrades, maybe endangering reliability.

"What we are trying to do," Mr. Rowe argues, "partly out of self-interest and partly to avoid sticking our customers with things that are really expensive, is to push for some sort of orderly environmental framework on the markets." He concedes that "we can make some money" on the EPA rules because Exelon has little coal in its energy mix "and we don't apologize for trying to make money on having cleaner energy."

But given the political reality of energy capital, federal regulation is "a lot better than to have every political party picking its favorite technology, and either subsidizing the hell out of it with government money or asking the utility to subsidize the hell out of it on customers."

But does Mr. Rowe really think the chaotic EPA rule-making process has been orderly? "The current leadership of EPA rightly or wrongly, largely rightly, sees cleaning up the energy fleet as its reason for being," he explains. "It wouldn't shock me at all if in some places they overdo it. It also wouldn't shock me if at some places, they see the criteria pollutants [traditional ones like nitrogen oxides and lead] as a way of substituting for the carbon regulation they wanted to do and didn't get. Both, all of those things are probably true, and yet it's also true that people with the old coal plants are gaming the system."

Mr. Rowe likens these plants to a "'49 Chevy" and explains that "there's been a big game of chicken in the industry because utilities have known these rules were coming for more than a decade" under the Clean Air Act, "and most of the utilities actually spent the money to get their plants somewhere close to compliance. We think about 60% of the coal fleet is. But some just decided to gamble. They just made one very big bet that these rules weren't gonna ever happen."

Mr. Rowe continues that "We object to their continuing to keep the market price down with plants that they're not going to clean up at all. We object to people running the plants just so they can trade shutting them down to some politician for building a new plant somewhere else."

The "real enemy here," Mr. Rowe continues, isn't the EPA. "It's what a whole lot of people who call themselves entrepreneurs, but really are living on their lobbyist, are doing getting legislators around the country to require utilities to buy power from stuff that has no connection with the economics at all."

Under the EPA approach, he says, the market will choose "the technology of choice when it becomes economic." That will almost certainly be gas. As for the possibility of blackouts, Mr. Rowe says that "Nobody wants to create reliability problems, last of all us. I know who hangs on the lamp pole first." Based on Exelon's analysis, the coal retirements can be managed over the interim by ramping up existing gas-fired generation that is running well below capacity in many parts of the country. "The stuff is there to be used," he says, while any local concerns can be handled with deadline extensions to allow time to build new plants.

The practical alternative to the EPA as Mr. Rowe sees it—"both parties continue to see utilities and the electricity industry as a hobby horse for their own particular social policy choice and for the creation of jobs"—will be far more expensive.

One example is state renewable portfolio standards, which force utilities to build or buy certain types of renewable power like the McDonnell-O'Malley offshore windfarm or Emanuel memorial field. Mandated nuclear would be another. Mr. Rowe says that Exelon regularly sees energy proposals where the price per ton of carbon reduction is between $100 and $400, while the cap and trade bill that House Democrats passed in summer 2009 came in around $25.

"If I could rewrite the world," Mr. Rowe says, there would be "some sort of modest pollution tax" including carbon and traditional air pollutants, not command-and-control regulation—"but no one's gonna let me do that." And he doesn't think either option is imminent. He even thinks President Obama "will continue to make concessions on the environmental front, because in truth it's not one of his big priorities. It's [EPA chief] Lisa Jackson's priority, but not the president's. I don't think he will collapse on it. He will hold the line on the hazardous air pollutants, I believe."

Whatever the current political moment, Mr. Rowe believes some kind of carbon control is inevitable: "Even if the Republicans should have a big win in '12, they're going to be faced with these huge revenue-entitlement trade-offs, and while I would love to see Paul Ryan's Medicare plan adopted, that's the most they could imagine doing. And even if they do something like that, they're gonna find they still need revenue." He says it's a matter of basic budget math.

"And so I think whatever we call the broadening of the tax base, the Republicans are going to be forced to look for some other source of revenue." Maybe its a national sales tax, maybe it's a value-added tax, but maybe the GOP "will look at some kind of pollution tax again. But that's five years, at least, away."

In the meantime, Mr. Rowe is optimistic, seeing a "cleaner world" as the U.S. gradually switches from coal to gas. Of course, he adds, "we hate cheap natural gas," which pulls down the wholesale price of nuclear. "It's a curse to us; it's great for America, but it's a curse to Exelon. I mean, Engine Charlie was wrong; not all things that are good for America are good for General Motors, and that's true for Exelon too."

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